KRE - KRE: Drying Liquidity Will Test Regional Banks This Summer

2024-05-06 22:23:50 ET

Summary

• Bank stability remains precarious as most banks are not very solvent if all their assets are accounted for at fair market value.
• Inflation indirectly affects banks, causing long-term fixed-rate securities and loans to decline as long-term rates rise.
• Since last year, banks have depended on "backup liquidity" from reverse repurchase liabilities, which should dry up over the coming months.
• As loan losses rise for smaller banks, particularly on CRE loans, there is little the Fed can do to prevent them from failing. Instead, the Fed appears focused on isolating the crisis from smaller banks.
• I expect KRE will continue to lose value as more fail as liquidity pressures likely increase over the summer.

The FDIC's bank failure list continues to grow, adding Philadelphia's Republic First Bank at the end of last month, not to be confused with First Republic. In recent years (since 2021) , I've warned investors of peculiar risks in the US banking system that I feel are widely underappreciated. Since banks began to fail last year, I've been particularly bearish on regional banks such as those in the ETF ( KRE )....

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